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A/o l<W ^ 



Pieter VanderWerf 

WP 1289-82 

March, 1982 





Pieter VanderWerf 

WP 1289-82 

March, 1982 


JUL 2 9 



Past empirical studies of the functional sources of process 
innovations have concentrated on innovations by process users and 
process equipment manufacturers. This paper identifies an 
industry in which, according to existing theories of innovation 
source, firms supplying parts to the production process have an 
especially high probability of being major innovators. It then 
presents a sample of economically important process equipment 
innovations from the industry, and finds that, indeed, such 
"suppliers" were the source of a majority. There follows a test 
of the theory that guided selection of the industry -- the theory 
of economic benefit -- as a predictor of the sources of the 
individual innovations in the sample. Qualitatively the paper 
also considers some of the factors that industry interviewees 
claimed were important additional influences on whether suppliers 
introduce a particular innovation. 

Q74 ' 



Past research has shown that the "functional" source of 
industrial process innovations can differ significantly from 
industry to industry. Studies of some industries have revealed 
users to be the source of most innovations (von Hippel 1976; von 
Hippel 1977). In other industries most came from manufacturers 
(Berger 1975; Boyden 1976). It has been hypothesized that these 
variations can be explained with economic factors (von Hippel 
1979), and that under certain conditions "suppliers" rather than 
users or manufacturers might be the greatest source of 
innovations in an industry. In particular, suppliers of variable 
physical inputs to a production process are expected to introduce 
innovations in the process when their potential profit 
("benefit") from doing so is high relative to that of other 
parties. I.e., if suppliers can get much more profit from 
originating an innovation than can users or manufacturers, they 
are the likeliest to do it. Since potential profits from 
innovation to the different parties vary in roughly predictable 
ways (according to market structures, market sizes, and profit 
margins) it should be possible to locate an industry of 
especially high supplier benefit for further study. 

This paper reports on an empirical study to document and 
investigate the phenomenon of supplier innovation. The 
researcher chose an industry that seemed a priori to have the 
conditions theoretically conducive to innovation by 
suppliers: the industry of electronic wire and cable 
termination. From this industry a sample was taken of important 


equipment innovations, which were then traced back to their 
sources. Finally the researcher evaluated some possible 
explanations for the patterns found. The paper begins with 
definitional and research background. It then outlines the study 
methods, presents the findings, and considers the relative 
benefit hypothesis and some other promising explanatory 


Following von Hippel (1979, p. 1), the functional source of 
a process innovation is here defined according to the functional 
relationship through which the innovator benefits from his 
innovation. If the innovator implements the innovation into his 
own production activities to improve them it is a "user" 
innovation. An example might be new welding equipment invented 
and developed by an automobile manufacturer for incorporation 
into his own auto body assembly line. If instead the innovator- 
sells equipment that embodies the innovation it is termed an 
"equipment manufacturer" or "manufacturer" innovation. This 
would be the case if improved welding equipment were invented by 
an industrial machinery manufacturer who then sold it to users 
for implementation in t heir plants. And if the innovator 
benefits because the innovation promotes the use of some other 
production process input that he sells, it is a "supplier" 
innovation. For example, it would be a supplier innovation if an 
acetylene producer invented welding equipment for use by firms 


that buy his fuel for their welding work. 

In the prototypical supplier innovation, the innovator is a 
firm that sells some part, component, or material for 
incorporation by customers into their final products. The 
supplier invents improved equipment for handling and/or applying 
its brand of supply item. This makes its brand more attractive 
to potential users, and some of them switch to it from 
alternatives sold by other suppliers. The result for the 
innovator is an increase in sales. In actuality, in every case 
recorded by this study of a supplier firm inventing application 
equipment for its parts, the firm also manufactured and sold or 
leased the equipment (like a manufacturer). These were still 
unambiguous cases of supplier innovation, however, when the firm 
made no profit on the equipment directly, but only from its 
promotional effect on the sale of the companion parts. In a few 
cases the supplier-innovator also used the equipment in-house 
(like a user). But again, if the proceeds from internal use were 
very small relative to the effect on part sales it is reasonable 
to classify the innovation "supplier." 

An illustrative example of supplier innovation is the 
development of the pneumatic ribbon cable press by the Minnesota 
Mining and Manufacturing Company. In the late 1960s 3M 
introduced a new type of electronic cable called "flat ribbon 
cable." Instead of holding a bunch of discrete wires together in 
plastic tubing, like most existing multiple-wire cables, a ribbon 
cable consisted, in effect, of wires laid side by side and fused 
along their insulations. They thus formed a long, flat "ribbon" 
of wires. A major potential advantage of the cable was 


convenience of "terminating" (attaching) connectors to the ends. 
(A connector is a sort of "electric plug" on the end of a 
multiple-wire cable for attaching the cable to a piece of 
electronic equipment.) Previously a separate contact had to be 
applied to each wire, and these were then inserted into a 
connector housing, one contact at a time. But 3M designed a 
connector that users could terminate over the end of a ribbon 
cable in one operation: "u"-shaped contacts in the connector 
pierce the insulation and make contact with the wires inside. 
Yet despite the ability to terminate ribbon cable connectors 
completely in one stroke, the older discrete-wire alternatives 
were still often competitive, partly because of the availability 
of automated equipment to perform the individual terminations of 
the separate wires at high speed. So ribbon cable's labor-saving 
advantage was mitigated. In 1973 an engineer at 3M suggested 
that a pneumatic ribbon cable terminator with a higher production 
rate than the hand presses then in use might be feasible. Though 
3M had no specific requests for such a machine, ribbon cable 
product managers encouraged the engineer to develop his idea. 
The result was a pneumatic assembly press into which an operator 
could place a connector and the end of a cable; he then pushed 
an activation button, and the press terminated the connector to 
the cable. 3M lent prototypes to the Digital Equipment 
Corporation for field testing, and sold the machine in 
essentially its original form starting in 1975. 

This example illustrates the essentials of supplier 
innovation. The innovator — 3M — did not use the machinery 
commercially in-house, nor was it sold at a significant profit. 


Rather, the innovator benefitted by lowering the relative cost to 
users of applying one of his existing products. 


Two previous studies have reported instances of supplier 
innovation, but neither one empirically documented a pattern in 
its occurrence or in how it might be related to the benefit from 
innovation . 

Detailed historical descriptions of innovative activities by 
certain materials suppliers come from Corey (1956). In several 
cases suppliers labored to develop methods for using their 
materials to make products that formerly were made from other 
materials. Corey's accounts are extremely informative of the 
nature of supplier involvement in process innovation. They are 
not intended, however, to comprise a random sample of innovations 
for statistical analysis. 

In a survey of inventions in the U.S. aluminum industry 
during 1946-57, Merton Peck recorded the development of "new 
processes in manuf acutur ing products from aluminum" by "producers 
of aluminum ingot" (Peck 1962). From a sample of 79 inventions 
for the working of aluminum into finished products he attributes 
eight (10.1%) to aluminum producers. The figure of 79 includes 
all inventions in the operations of "joining" (52) and 
"finishing" (27). These, it appears from the paper, were 
operations not performed by aluminum producers themselves, but by 


their customers. Of these 79, seven are attributed to "primary 
aluminum producers," and one to "secondary aluminum producers." 
The analysis includes no empirical data on benefit nor any tests 
of its influence. In addition, the author claims to have used 
trade journals as his source of information for selecting 
inventions and determining their sources. This suggests the 
possibility of a bias in the sample toward attributing 
innovations to firms that had innovation-related products to sell 
and the motivation to contact a journal. And indeed a partial 
replication of the study by von Hippel confirms the existence of 
such a bias (von Hippel 1981). 


4.1 Industry Selection 

Since the goal of the study is to show the existence of 
supplier innovation and investigate its nature, the researcher 
sought an industry in which it was likely to be present. 
Theoretical characteristics of such an industry are suggested by 
von Hippel (1979, pp. 34-7): 

(1) a large number of process users, no one of which accounts for 
a large fraction of total supply item use. 

(2) a high rate of consumption in the users' production process 
of supply items that carry a relatively high profit margin 
for the suppliers that sell them. 

(3) total sales of supply items that greatly exceed sales of the 
companion application equipment. 

Page 7 

Under these conditions supplier benefit from innovation relative 
to that of other parties should be especially high. The profit 
value and high volume of the parts consumed in the production 
process gives suppliers strong economic incentive to influence 
how the process is performed. Compared to this potential profit, 
any one user can realize only small cost savings from innovation 
(Remember, each user is a small part of the total market). And 
the equipment manufacturers have much smaller markets to compete 
for . 

Though any number of industries may appear a priori to meet 
most of these specifications, very few promise to meet them all. 
In particular, most high-volume production processes that have 
many small users (e.g., beverage bottling, clothing manufacture, 
wire forming) use inputs with slim profit margins for their 
sellers (e.g., bottles, buttons and zippers, structural wire). 
Knowledge of the electronics industry suggested that electronic 
wire preparation might meet all the desired criteria, so it was 
chosen for study, though the researcher initially had no 
knowledge of its major innovations or their origins. 

Wire and cable termination is traditionally a necessary part 
of the manufacture of almost every common type of electronic 
equipment. The wires and cables are used primarily to 
interconnect subassemblies within a piece of electronic 
equipment, connect the circuitry of the subassemblies to the 
controls on the cabinet, or link one piece of equipment to 
another. Preparing the wire/cable involves cutting it to length, 
stripping insulation off the ends (except when insulation 
displacement or insulation piercing techniques are used), and 

Page 8 

attaching terminals or connectors to the ends. Terminals and 
connectors are the metal parts actually plugged, screwed, or 
clipped to the points to which the wires are meant to connect. A 
terminal attaches to the end of a single wire; a connector 
attaches to the ends of several. 

Table 1 gives some sales and purchase statistics for the 
industry. The primary headings are the major types of supply 
items in the industry. Listed for each supply item are estimated 
1981 sales and the fraction of the total purchased by its largest 
user. Below each item are the major categories of equipment used 
for its preparation/application, and an upper bound estimate of 
the 1981 sales of this equipment. For an explanation of the 
criteria used to select the supply item and equipment categories, 
see section 4.2. 

The users of wire termination are highly diffuse. For only 
one of the major types of wire, cable, terminal, or connector for 
which data are available does any one firm buy over 5% of total 
sales, as seen in Table 1. Indeed, electronics is a part of so 
many products that there are probably thousands of U.S. firms 
that do some wire preparation. Common users include 
manufacturers of computers, automobiles, appliances, and 
aerospace equipment. There are even firms that do nothing but 
wire preparation, working on a contract basis for the electronic 
products manufacturers. 

The markets for the major types of wire, cable, and 
termination parts runs into the tens and hundreds of millions of 
dollars per year, also shown in the table. The bulk of each of 
these items is supplied primarily by a handful of firms, many of 


Max imum 
Current Largest Annual 
Annual Single User Equip. 
Sales Consumption Sales 
($mil . ) Share ($mil . ) 

Discrete Hookup Wire 

Cutting and stripping 
Critical Applications Discrete Wire/a 

Nickless stripping 
Multiple Discrete Wire Cables 

Discrete wire stripping 
Ribbon Cable 

Cutting and stripping 
Flat Conductor Cable 












1 .4 




Crimp Terminals 

Crimp termination 
Crimp Connectors 

Discrete wire crimping 

Crimp connector assembly 
Heat-shrink Solder Tubing 

Solder connector assembly 
Insulation Displacement Connectors 

ID connector assembly 
Ribbon Cable Connectors 

Flat Conductor Cable Connectors 


200/b <5% 
484/c <5% 

















Source : Estimates of marketing 
estimates were averaged 

and product managers 


/a Includes discrete hookup wire and multiple discrete wire cables 
used primarily in the aircraft and aerospace industries. 

/b Includes crimp contacts for insertion into connector housings. 
These are applied with equipment classified under "Discrete wire 
crimping" and inserted with equipment classified under "Crimp 
connector assembly." 

/c Does not include military-grade connectors. 

Page 10 

which do a little wire preparation for their customers, and 
several of which sell or lease some application equipment for 
thei r products . 

Termination parts carry high profit margins, as bulk supply 
items go. According to interviewees within termination parts 
firms, some larger companies regularly realize a pre-tax return 
on sales of 20% or more, as compared with a more normal 1% for 
wire and cable claimed by wire firm personnel. 

The annual dollar sales of the application equipment for 
these supply items are generally much lower than the sales of the 
items themselves. A glance at the table shows that known 
equipment sales are never even a tenth the sales of the 
corresponding supply item. Such pairwise comparisons are 
misleading because much of the equipment classified under one 
supply item can be used to handle others, too, but they do serve 
to demonstrate the large difference in market sizes. 

4.2 Classification of Firms 

Complications in classifying firms proved minor. None of 
the firms coded as user regularly sold wire, cable, or 
termination parts, or any wire preparation equipment. None of 
the firms coded equipment manufacturer regularly sold any of the 
supply items or prepared wire or cable for resale. 
Categorization was less clear-cut for the firms considered within 
the industry to be suppliers; some perform wire and cable 
preparation in-house (like a user), and many sell or lease 
equipment (like a manufacturer). However, their primary benefit 
from innovating in equipment clearly came from an increased sale 

Page 1 1 

of parts: in-house preparation was purportedly always a minor 
activity (measured in dollars) compared to part sales, and 
equipment sales were a break-even activity to support the 
marketing of parts. It was thus felt correct to call these firms 
suppliers, as do actual industry participants. 

4.3 Sample Selection 

The researcher sought a complete sample of the economically 
"important" equipment innovations of the industry. The process 
was begun by simply asking users within the industry which 
improvements in equipment they considered major. The pattern 
that emerged was that an "important" innovation has wide 
applicability and offers users large labor productivity 
increases. Every piece of innovative equipment they identified 
was applicable to a major class of wire or cable (not merely a 
subtype thereof) and had a labor productivity at least 1 2/5 
times that of any equipment to do the same job that was 
previously available. It was therefore decided to use the 
following selection procedure: 

(1) Identify the five commercially most important types of 
electronics wire and cable, as measured by sales. (Coaxial 
cable, often used in electronics, was considered a supply 
item for the communications industry and therefore omitted at 
the outset . ) 
* (2) For each type of wire/cable, identify the steps of 
preparation that have experienced major equipment 
innovations, where a "major equipment innovation" is the 
introduction into commercial production operations of 

Page 12 

equipment with a sustainable labor productivity at least 

1 2/3 times that of previously available methods. (For the 

methods and data used to calculate this "productivity ratio" 

for each innovation, see Appendix A.) 

(3) For each of the selected process steps find all equipment 

innovations that meet the criterion for being "major." 

The choice of a 1 2/3 multiplication of labor productivity 

as a cutoff was somewhat arbitrary. As noted above, 1 2/3 was 

the lowest incremental productivity gain of any of the 

innovations identified as important in the initial round of 

interviews. When it was adopted tentatively as an acceptance 

criterion, it was found that it yielded an adequate but 

manageable number of sample innovations, so it was retained. 

Focusing exclusively on labor productivity admittedly leaves out 

other considerations of user utility from technological change. 

Multi-factor productivity measures can take into consideration 

the costs of the equipment itself and of the energy and materials 

consumed in the production process. Measurement was limited to 

labor requirements because of data availability. How much the 

innovation list might have changed had acceptance been based on 

the increase in multi-factor productivity is uncertain. 

In practice the researcher performed the steps of the sample 
selection procedure by extensive telephone interviewing. The 
list of wire and cable types was verified with marketing managers 
of major U.S. wire and cable firms. Production personnel in 
user firms were questioned to find the process steps experiencing 
major innovation. To identify all the major innovations of each 
process step, users, manufacturers, and suppliers were all 

Page 13 

solicited for histories of equipment development and data on 
production rates. From this was derived the list of qualifying 
innovations for each step, which the researcher read back to the 
interviewees for additions and amendments. 

The results are summarized in Table 2. Under the 5 wire 
types are the applicable process steps, and under each of these 
are the innovations. Heading the innovation list for each 
process step is the original method used to perform the step. 
These "original practice" methods were not counted among the 
innovations. After each qualifying innovation is also listed the 
ratio of its production rate per operator to that of the next 
best equipment available at the time of the innovation's first 
commercial use, as calculated using the methods of Appendix A. 

Many process operations can be performed on the same types 
of equipment for more than one type of wire or cable. These are 
included under only one type, with the result that some 
wire/cable headings do not bear all of their relevant process 
steps . 

4.4 Determination of Innovation Sources 

To determine the source of each innovation the researcher 
first canvassed industry people to find the firm that first 
introduced it commercially. In the identified firm the 
development engineers and (where possible) the product managers 
resposible for the innovative equipment were interviewed to 
obtain first-hand accounts of the project, except in a few cases. 
In the exceptional cases it was only possible to have another 
member of the firm ask the questions of these people and report 

Cutting and Stripping 
Hand tools 

(1) Automatic cut and strip machine 

(2) Linear feed cut and strip machine 
Crimp Termination 


(3) Automatic lead-making machine 

(4) Power crimp bench press 

(5) Strip-fed crimp press 

Nickless Stripping 

Calibrated mechanical strippers 

(6) Thermal stripper 

(7) Die-type hand stripper 

(8) Semi-automatic die-type stripper 

Discrete Wire Stripping 
Hand tools 

(9) Rotary stripper 
Solder Connector Assembly/b 


(10) Heat-shrink sleeve assembly racks 
Discrete Wire Crimping 

Hand tools 

(11) Stripper-crimper 
Crimp Connector Assembly 


(12) Crimp connector assembly machine 
Insulation Displacement Connector Assembly 

Hand tool 

(13) Semi-automatic insulation displacement terminator 

(14) Automatic insulation displacement harness maker 


Cutting and Stripping 
Hand tools 

(15) Automatic ribbon cable cutter 

(16) Automatic ribbon cable cut and 

Hand Press 

(17) Pneumatic ribbon 

Productivity Ratio 


strip machine 


Semi-automatic ribbon cable terminator 
Automatic ribbon cable harness maker 


15. 1 

2. 1 

1 .9 








Termi nation 
Hand welding 
(20) Flat conductor cable crimp stitcher 


TABLE 2: INNOVATION SAMPLE (Footnotes next page) 

/a The category "multiple discrete wire cables and assemblies" 
includes some discrete hookup wire; specifically, the hookup wire 
bought by users to construct wiring harnesses. It was included 
under this category because the process equipment required to 
prepare it is often the same as that used for multiple discrete 
wi re cables . 

/b There are three generic connector types, each requiring distinct 
application equipment: solder, crimping (requiring the operations 
of discrete wire crimping and crimp connector assembly), and 
insulation displacement. All three were included because industry 
interviewees claimed they were all in widespread use. 

Page 16 

their responses. Any contact during development with outside 
firms or individuals was noted. These outside parties the 
researcher then contacted to determine whether any had 
contributed design ideas to the effort. As a final check on 
origin the researcher asked disinterested experts on the process 
operation involved for any evidence that similar equipment 
existed anywhere else before the commercial introduction. When 
any of this revealed a development project that preceded the 
commerci al izer ' s , the procedure was begun anew, the earlier 
project being researched in the same manner. 

The date and source of each innovation are listed in Table 
3. An inability to collect first-hand information made it 
impossible to determine with confidence a source for any 
innovation introduced before 1935, so such innovations were 
excluded from statistical analysis. The date is the year of 
first completion of a unit used in commercial production 
operations. Where the exact date is unknown there is presented 
as narrow a range of years as could be determined. 


5.1 Innovation Sources 

As hypothesized, suppliers were a major source of 
innovations. Omitting the two innovations of undetermined 
source, 56% are attributed to suppliers and M% to nonsuppl ier s . 

Of 20 innovations identified, for 10 it was a supplier firm 




Termination Equipment 





















Automatic lead-making machine 
Pneumatic crimp bench press 
Strip-fed crimp press 
Heat-shrink sleeve assembly racks 

Crimp connector assembly machine 
Semi-automatic ID terminator 
Automatic ID harness maker 
Pneumatic RC press 
Semi-automatic RC terminator 
Automatic RC harness maker 
Flat cable crimp stitcher 

User-Manufacturer 1939 


Suppl ier 



Suppl ier 

Suppl ier 



Suppl ier 



Wire- and Cable-Handling Equipment 

Automatic cut and strip machine 
Linear feed cut and strip machine 
Thermal stripper 
Die-type hand stripper 
Semi-automatic die-type stripper 
Rotary str ipper 
Automatic RC cutter 
Automatic RC cut and strip machine 





User -manufacturer 








197 7 
















/a The source of an innovation is the category of the firm that 
designed and built the first unit of equipment embodying the 
innovation that was used in commercial production operations. The 
categorization depends on how the firm benefitted from the 
innovative equipment, whether by using it (user), selling it 
(manufacturer), or employing it to promote the sale of the supply 
item used in it (supplier). 

Page 1 

that designed and built the first machine embodying the 
innovative function to be used in commercial production 
operations. In none of these cases did the investigation uncover 
any outside party that contributed significant design ideas or 
funds to the project. User input, if present at all, was 
typically limited to indefinite requests for more automated 
equipment . 

Another 8 innovations were nonsupplier: a manufacturer 
developed the equipment in 5 cases, a user in 1 case, and 2 
innovations were the result of joint user-manufacturer 
development projects. The 2 remaining innovations were too old 
(pre-1935) for reliable determination of a source, so they were 
omitted from statistical analysis. 

Examining the differences between the innovations from 
suppliers and those from nonsuppliers revealed an interesting 
pattern. This pattern is apparent when the innovations are 
divided according to type of supply item handled: equipment that 
processes only wire or cable and equipment that applies 
termination parts. As seen in Table 2, suppliers originated 10 
innovations for handling termination parts, but none strictly for 
wire and cable handling. Nonsuppliers, in contrast, originated 2 
for termination and 6 for conductors. Looked at differently, 10 
of the 12 termination innovations were the work of suppliers, 
while n one of the strictly conductor-handling innovations were -- 
nonsuppliers accounted for all 6 of those. 

This is a stronger pattern than one would expect from chance 
alone. Using a Fisher Exact test, one can test the hypothesis 
that suppliers were just as likely to have introduced one of the 

Page 19 

purely wire/cable innovations as they were one of the innovations 
that handles termination parts. The result is a rejection of the 
hypothesis at the .005 level of statistical significance. 
(Specifically, the sample consists of 12 innovations of the 
termination type and 6 of the wire/cable type, and 10 of the 
total 18 are of the supplier source. Now consider the hypothesis 
that the probability of an innovation being of the supplier 
source is independent of the innovation's type. Given the 
above-mentioned data conditions, under the null hypothesis the 
probability that as many as 10 of the supplier-source innovations 
are of the termination type is .00151.) 

5.2 Test of Source-Benefit Correlation 

The researcher undertook to test the relationship between 
relative benefit and the sources of the innovations in the sample 
on a case-by-case basis. Data were solicited to enable estimates 
of potential benefit for each of the 18 pieces of innovative 
equipment, and for 9 of them the attempt was successful. For 
each of the 9, three calculations were made: 
(1) Supplier benefit: the total profit on all parts used in all 

active units of the innovative equipment in the year 5 years 

after its commercial release. 
(1) Manufacturer benefit: the potential profit on all units 

placed with users during the fifth year after commercial 

release . 
(3) User benefit: the cost savings from the equipment to the 

single largest user during the fifth year after commercial 

release . 

Page 20 

Focus on the fifth year was somewhat arbitrary: there were 
insufficient data to perform complete time discounting of profit 
streams, and so this was chosen as a representative period. For 
the exact methods of calculation and consideration of some of the 
simplifying assumptions, see Appendix B. Many of the data are 
proprietary, revealed on condition of confidentiality. They are 
therefore not reproduced here. 

Unfortunately, what is here called "supplier benefit" is a 
gross overstatement. The interviewees in supplier firms 
explained that much or most of the parts put through their 
innovative equipment they would have sold whether they had 
originated the equipment or not. Many customers that already 
used or planned to use an innovating supplier's part would be 
among those acquiring the machine. So to estimate true supplier 
benefit from an innovation we would need an estimate of the 
fraction of the total part consumption that was "new business." 

Again unfortunately, no one felt qualified to estimate such 
a number. The new business fraction is highly uncertain, even in 
retrospect. To predict what it will be (in the case of 
innovations released less than 5 years ago) or would have been 
had a supplier been the innovator (in the case of innovations 
originated by manufacturers or users) is high guesswork. 

Nonetheless, to make it possible to perform a test the 
theory was modified: suppliers will tend to be the source of 
innovations for which the "supplier benefit", as defined above, 
is very high relative to the benefit of nonsuppl i er s . For each 
of the 9 innovations the researcher calculated the ratio of 
"supplier benefit" to the benefit of the actual innovator (in the 

Page 21 

case of a nonsupplier innovation), or to the benefit of the 
nonsupplier party with the highest benefit, which was considered 
the logical alternative innovator (in the case of a supplier 
innovation). The results were then rank ordered as shown in 
Table 4. 

Informal inspection of the rank order list reveals no strong 
relationship between the size of the potential benefit of 
suppliers relative to nonsuppliers and the source of an 
innovation. Manufacturer and user innovations are near the top 
and bottom of the list while supplier innovations dominate the 
middle. To test rigorously, one can use the Mann-Whitney U 
procedure to test the null hypothesis that the distribution of 
benefit ratios is the same for supplier and nonsupplier 
innovations against the alternative hypothesis that the benefit 
ratios for supplier innovations come from a higher distribution 
than the distribution for nonsupplier innovation ratios. The 
result is that the test cannot reject the null hypothesis at even 
the 50% level of statistical significance. (More precisely, U = 1 
for the nonsupplier group, and the probability of a U-value that 
small or smaller under the null hypothesis is .548.) So it was 
not possible to offer evidence that supplier innovation tends to 
occur more frequently among innovations with a high relative 
supplier benefit. 

Conversely, the analysis has not offered strong proof 
against the hypothesis. The measures of benefit utilized many 
simplifying assumptions that may have severely reduced their 
accuracy (See Appendix 3). Furthermore, the sample was so small 
that the chance of accepting the no-relationship hypothesis even 



Non suppl ier 






Benef itter 








543. 2 


Suppl ier 

Terminat ion 






Te rminat ion 





Suppl ier 







Terminat ion 





Suppl ier 
















1 .2 


User-Manu . 










Page 23 

if it were false (i.e., the probability of a type II error) was 
probably very high. 


When they were questioned directly the interviewees had 
several explanations for the pattern of innovation sources found. 
In particular, they forwarded reasons for why termination parts 
suppliers might be expected to innovate in application equipment 
where wire and cable suppliers did not. It was not possible to 
quantify these hypotheses, but they are outlined here for 
consideration. But first as an introduction there is a summary 
of these people's observations on the motivations for supplier 
innovation in general. 

6.1 Supplier Innovation Strategy 

Industry interviewees gave detailed explanations for why the 
suppliers in the sample innovated. Suppliers gained nothing from 
the sale of the equipment itself: all claimed to try to price 
their equipment just to break even on it. Sometimes they even 
took a loss. They benefitted by using the innovative equipment 
to increase sales of their parts, though the mechanisms through 
which this occurred varied. 

When a firm is the dominant supplier of a particular item, 
as 3M was in ribbon cable and ribbon cable connectors during the 
early 1970s, it can benefit from the free dissemination of any 
equipment to lower application cost. The supply item becomes 

Page 24 

cheaper for users to incorporate into their products, so some 
switch to it from the functional alternatives. Chances are that 
the bulk of this sales increase will fall to the dominant 
supplier, whence comes his motivation to innovate. 

The situation is more complex when the supplier has only a 
minor share of the market for a supply item. Under these 
circumstances it doesn't help as much to increase the entire 
market for the item. It can be easier to gain sales by luring 
customers directly from the competing brands, appropriating 
market share. In practice suppliers accomplish this by leasing 
their innovative application equipment and making the use of 
their brand of part a condition of the lease. In some cases such 
leasing arrangements will consist simply of a minimum required 
monthly or annual purchase of parts per machine. There are also 
some legal sanctions available to suppliers. In Japan and Europe 
a supplier can sometimes require outright that users employ only 
his parts in equipment he has leased to them. In the U.S. this 
is not possible, but a supplier can charge a "usage fee" on 
equipment and make it applicable only when competitors' parts are 
used in the machine. This makes the use of competitive parts 
economically unattractive. And lastly, as legal owner of the 
equipment the supplier retains responsibility for repair. If 
users put foreign parts through the machinery the suppliers' 
repair staff can threaten to refuse to service it on the grounds 
that it has not been treated in accordance with recommendations. 
For some or all of these reasons users that want to use a 
particular supplier's equipment will oe influenced to buy his 
parts for use in it also. When these users are firms that 

Page 25 

otherwise would have bought competing brands the supplier scores 
an increase in sales. 

6.2 Differences Between Wire and Terminal Firms 

Some of the respondents argued that wire suppliers simply do 
not have the expertise to design and manufacture process 
machinery. This argument rests on the point that wire suppliers 
are expert in metal drawing, plastics extrusion, and various 
other operations that prepare them but poorly for mechanical 
equipment innovation. 

This argument is questionable for a couple of reasons. 
First, wire manufacturing firms do have some experience with the 
process equipment. Some of the largest claimed that they do wire 
and cable preparation in-house on a contract basis, and modify 
the process equipment to suit their needs. And in at least two 
cases of cable-handling innovation by manufacturers, the major 
suppliers of the cable also sold termination parts for which they 
had originated application tooling innovations in the sample. So 
there clearly existed suppliers with machinery expertise that 
failed to innovate in the equipment to handle their cable. 
Second, the termination part suppliers allegedly did not all have 
significant equipment expertise originally either, and yet they 
innovated. They acquired the necessary skills somehow. 

6.3 Greater Standardization of Wire and Cable 

Some maintained that if a supply item is highly standardized 
a supplier has no incentive to introduce application equipment 
for it. Any firm's brand of item could be used in the equipment, 

Page 26 

so introducing the machine would not much benefit any one 
supplier. In effect, a supplier's economic benefit from 
equipment innovation is much lower if the item handled is 
undifferentiated. Since the types of wire and cable used in the 
high-volume equipment listed here are highly standardized, our 
calculated benefit might have been overly large for wire and 
cable innovations. 

It may well be that the more standardized a supply item the 
more difficult it is for a supplier to link use of his part to 
use of his equipment. However, it is difficult to accept that 
standardization rules out supplier innovation completely, for 
there exist counterexamples. There were at least two cases of 
supplier innovation in which the machinery would accept competing 
brands of the supply item directly, and at least one more where 
it could do so with minor adjustment. The innovator firms in 
these cases insured that users would put their brand of part in 
the equipment by leasing the equipment and imposing the sorts of 
leasing controls mentioned previously. 

6.4 Different Expectations 

Some industry participants argued that suppliers of wire, 
unlike suppliers of termination parts, "just never got involved" 
in application equipment production. Initially this response 
sounds circular ( Why did they not get involved?) but there is a 
logic to i t . 

For whatever reasons — greater economic incentive, greater 
expertise, greater differentiation of product -- termination part 

Page 27 

suppliers apparently undertook regular development of automated 
application tooling before equipment manufacturers, whereas wire 
suppliers did not. Thus, in termination "everyone knows" that if 
a supplier leapfrogs competitors in application tooling he can 
pirate away significant sales from them, and if he lags in this 
department his sales will gradually erode as users switch to the 
firms with the best equipment. Users themselves have little 
incentive to develop new equipment since the suppliers are doing 
the work for them. Manufacturers may occassional ly introduce 
some equipment for termination (as they in fact have), but are 
discouraged by the saturation of demand by suppliers, many of 
whom sell or lease equipment at no profit. In contrast, in wire 
and cable handling "everyone knows" that whatever equipment a 
supplier could produce some manufacturer will also produce and 
may already be working on. And the manufacturers' versions will 
handle all brands of supply items. It is thus pointless for a 
supplier to try to innovate. The benefit calculations, according 
to this line of reasoning, are incorrect because they omit these 
strategic factors; 

This argument, too, has weaknesses. It seems to say that 
firms will never try to break into new markets. Certainly the 
two termination innovations introduced by nonsuppliers could be 
considered contradictory evidence. Unfortunately, it is 
impossible even to begin to test the hypothesis here: that would 
require twenty industries, not twenty innovations. 

Page 28 


This study has probably raised more questions than it has 
answered. It has established the existence of supplier 
innovation and discovered some components of its motivation and 
nature. Precisely why supplier innovation occurs when and where 
it does remains something of a mystery, however. But perhaps it 
is a mystery not because we do not have the answer, but because 
we cannot test the answer to be certain. Economic incentive 
theories, which have achieved some success in other studies 
(Spierings 1979, von Hippel 1979) looked throughout the sample 
selection as though they could explain most of the innovation 
source variation. Unfortunately the market and strategic 
considerations that shape potential innovators' expectations of 
benefit in the industry were so many and complex that it proved 
too difficult to gather the data necessary for a realistic test. 
If nothing else, it is hoped that this study has at least pointed 
the way to a fruitful area of inquiry. 

To probe this research question further, it would be 
desirable to have more detailed historical data for each 
innovation and to survey a set of industries, rather than merely 
the innovations within a single industry. Lack of detailed data 
made it difficult to give even the simplest hypotheses a fair 
test. Gathering information for a set of industries might reveal 
or help to verify industry-specific factors that influence the 
degree of supplier involvement in process innovation. The 
problem with gathering more and better data is, of course, 
limitations on time and ability. Many of the data of interest 

Page 29 

for analysis of individual innovations are proprietary, internal 
information of a particular firm. It is often very 
time-consuming to locate anyone who claims to know them 
accurately, and very difficult to induce these people to reveal 
them, even with promises of confidentiality. Perhaps some more 
aggregated and readily accessible variables could be used in a 
cross-industry study. 

Page 30 


The criterion for inclusion of an innovation in the sample 
was that its sustained labor productivity be at least 1 2/3 times 
that of the next best equipment available at the time of first 
commercial use of the innovative equipment. "Next best 
equipment" here refers to the piece or combination of pieces of 
equipment that had the next highest labor productivity. To test 
candidate innovations the researcher calculated a "productivity 
ratio" and compared it to 1 2/3. This is the ratio that appears 
after each innovation in Table 2. 

The formula for this ratio depended on whether the 
innovative equipment was compared to 1 or 2 pieces of alternative 
equipment. If the new equipment executed an operation that was 
formerly done on one piece of equipment the formula was: 

where FIO = the fraction of the total paid operator time that the 
innovative equipment is in actual operation 
excludes repair and set-up time. (Fraction) 
PI = the production rate of the innovative equipment while 
it is in actual operation. (Completed wires, cables, 
or terminations/machine-hour) 
01 = the number of operators required per unit of the 

innovative equipment. (Operators/machine) 
FAO = the fraction of the total paid operator time that the 
alternative equipment is in actual operation — 
excludes repair and set-up time. (Fraction) 

Page 31 

PA = the production rate of the alternative equipment while 
it is in actual operation. (Completed wires, cables, 
or terminations/machine-hour) 

OA = the number of operators required per unit of the 
alternative equipment. (Operators/machine) 

In several cases the innovative equipment combined 
operations formerly performed on two separate pieces of 
equipment. In such cases a modified version of the formula was 
used : 

PRODRAT = (FIOxPI/OI) / [1 / (1/P0A1 + 1/P0A2)] 
where P0A1 = FAOxPA/OA, as defined above, for the first piece of 
alternative equipment, i.e., the sustained hourly 
output per full-time operator. (Wires, cables, or 
P0A2 = FAOxPA/OA for the second piece of alternative 
equipment. (Wires, cables, or terminations/operator-hour) 

When interviewees said that operator time lost to repair and 
set-up time was negligible, the operation fraction (FIO or FAO) 
was set equal to one. 

When the production rates of the equipments under 
consideration depended on the form of the output (length of wire, 
configuration of terminations, etc.) interviewees were asked for 
a "typical" form and the rates applicable to that were used. 

The productivity data collected for each innovation are 
given in Table 5. 



(2) Linear Feed C & S Machine/a 

Automatic C & S Machine 

(3) Automatic Lead-Making Machine/b 

Automatic C & S Machine 
Crimper Dikes 

(4) Pneumatic Crimp Bench Press/c 

Cr imper Dikes 

(5) Strip-Fed Bench Press 

Power Crimp Bench Press 

(6) Thermal Stripper 

Calibrated Mechanical Strippers 

(7) Die-Type Hand Stripper 

Thermal Stripper 

(8) Semi-Automatic Die-Type Stripper 

Die-Type Hand Stripper 

(10) Heat-Shrink Sleeve Fixtures 

Hand Assembly 

(11) Str ipper-Cr imper/d 

Rotary Stripper 
Strip-Fed Bench Press 

(12) Connector Assembly Machine 

Strip-Fed Bench Press 
Hand Crimp Insertion 

(13) Semi-Au toma tic ID Terminator 

ID Hand Tool 

( 1 4 ) Automatic ID Harness Maker/e 
Linear Feed C & S Machine 
Semi-Automatic ID Terminator 

(15) Automatic Ribbon Cable Cutter/f 

Pneumatic Ribbon Cable Press/g 

(16) Automatic RC C & S Machine/h 

Automatic Ribbon Cable Cutter 
Abrasive RC Stripper 



01 FAO 

PA 0A 

0.97 7000 0.25 
0.75 3000 1 

150 1 

600 1 

400 1 

845 1 

1579 1 

545 1 

900 1 

1000 1 

1250 1 

0.75 3400 0.16 



3400 0.17 
150 1 

75 1 

300 1 

<200 1 

400 1 

845 1 

86 1 

540 1 
1200 1 

1200 1 
720 1 

275 1 






7000 0.25 
1250 1 




96 1 





3500 1 
40 1 

(continued on next page) 

(17) Pneumatic Ribbon Cable Press/i 

Hand Ribbon Cable Press 

(18) Semi-Automat ic RC Terminator 

Pneumatic Ribbon Cable Press 

(19) Automatic RC Harness Maker/j 

Automatic Ribbon Cable Cutter 
Semi-Automatic RC Terminator 

(20) Flat Conductor Cable Stitcher 

Hand Soldering 

96 1 

450 1 

450 1 

3600 1 

48 1 

96 1 

3500 1 
225 1 

600 1 


/a As 
/b As 

/c As 

/d By 


/e As 
/f As 
/g Th 

/h As 

/i Te 




/j As 


II a 
e pn 
e en 
ui va 

s machine 
s machine 

end . 
s tools a 
ircr af t . 
time o 
str ip-f 
/hour . 
s termina 
s machine 
ating . 
s machine 

ation r 
tors atta 
a ted per 
lent of t 
s machine 
tor to ea 

s are cutting 8-inch wires. 

s are cutting 8-inch wires with a terminal attached 

re applying heavy-duty terminals of the sort used in 

f release of the stripper-crimper the production rate 
ed bench press had improved to nearly 1200 

tions of 8-inch wires. 

s are cutting 24-inch cables. 

ribbon cable press is used for cutting as well as 

s are cutting 24-inch cables and stripping them at 

ates fo 
ched per 

hour . 
ermi nat i 
s are 
ch end . 

r ribbon cable are given in numbers of 
hour, not the number of individual wires 
Attaching one ribbon cable connector is the 

ng as many as 50 individual wires. 

cutting 24-inch cables and attaching a 

Page 34 


To calculate the economic benefit to each party from an 
equipment innovation a set of standard formulas was established. 
The formula for supplier benefit was: 
SUPBEN = TP x PC x PP x UF x SRS x 2112 
where TP = total accumulated placements (sale or lease) of 
equipment during the first five years after commercial 
release. I.e., the "number of machines in the field." 
(Machines ) 
PC = the hourly part consumption of a unit of equipment in 

operation. (Parts/machine-hour) 
PP = the average price of the parts used in the equipment. 

(Dollars/part ) 
UF = the fraction of the working day that the average piece 

of equipment is actually in use. (Fraction) 
SRS = the supplier's return on sales from the sale of the 

parts . (Fraction ) 
2112 = the normal number of work hours in a year for user 
wire preparation operations. (Hours/year) 

The formula for manufacturer benefit was: 
where MP = the number of units of equipment placed during the 
fifth year after commercial release. (Machines/year) 
PE = the average sales price for one unit of equipment. 

Page 35 

MRS = the manufacturer's return on sales from sales of the 
equipment. (Fraction) 

The formula for user benefit was: 
USEBEN = [ (LAxPIxFO)/(FAxPA/OA) - (FIxOIxLA)] x 21120 
where LA = the largest accumulation of equipment by any one user 
firm in the first five years after commercial release. 
PI = the production rate of the innovative equipment while 
it is in actual operation. (Completed wires, cables, 
or terminations/machine-hour) 
FO = the fraction of work time that the innovative 
equipment is in actual operation -- excludes idle, 
repair, and set-up time. (Fraction) 
FA = the fraction of the total paid operator time that the 
next best alternative equipment is in actual operation 
— excludes repair and set-up time. (Fraction) 
PA = production rate of the next best alternative equipment 
while it is in actual operation. (Completed wires, 
cables, or terminations/machine-hour) 
OA = number of operators required per unit of the next best 

alternative equipment. (Operators/machine) 
FI = the fraction of work time that the innovative 
equipment must be tended to by operators — includes 
repair and set-up time. (Fraction) 
01 = number of operators required per unit of 

innovative equipment. (Operators/machine) 
21120 = the typical annual wages and overhead for equipment 

Page 36 

operators. (Dollars/operator) 

For each of the nine innovations, estimates were obtained 
for all symbolic variables in the equations. For innovations not 
yet released a full 5 years, the estimates are projections. 

When interviewees said that operator time lost to repair and 
set-up time was nelgigible, the operation fraction (FAO) was set 
equal to one. When the production rates of the equipments under 
consideration depended on the form of the output (length of wire, 
configuration of terminations, etc.) the interviewees were asked 
for the most "typical" form, and the rates for that were used. 

A number of simplifications in the calculations and data 
collection may have contributed to inaccuracy in the benefit 
estimates. Those considered the most serious are discussed 
below . 

Use of current amount s for economic variables . For lack of 
historical data, the price of parts (PP), the price of a unit of 
innovative equipment (PE), the wages and overhead for one 
operator (21120), the supplier's return on sales of parts (SRS), 
and the manufacturer's return on sales of equipment (MRS) were 
set equal to their current values. As far as the prices and 
labor costs are concerned, this simplification is of no 
consequence for the calculation of relative benefits if all these 
quantities have risen since the fifth year after 
commercialization by exactly the same proportion. If not, this 
has introduced biases. If the return on sales percentages are 
higher (lower) than in the years just after the commercialization 
of the equipment, the supplier and manufacturer benefit figures 

Page 37 

will be relatively too high (low). 

Use of actual results for hypothetical situations . In each 
case only one of the three parties originated the innovation. 
The benefit of this party was calculated from actual historical 
market data (or projections). The benefit for each of the other 
two parties is, in theory, what they would have gotten had they 
been the innovators instead. But to estimate this, data from the 
actual innovator's experience was used, which may be unrealistic. 
For example, when a supplier originated an innovation, it is 
implicitly assumed that if a manufacturer had done so instead he 
would have placed just as many units with users at the same 
price. In reality, a manufacturer might have placed more 
(because his machines will use all brands of part) or fewer 
(because the suppliers' marketing organizations are larger). His 
price might have been higher (because he takes a bigger markup on 
equipment) or lower (because his expertise and production 
efficiency in equipment is greater). Likewise, if a user had 
originated the equipment he might have incorporated more or fewer 
units into his operations, been able to design it more or less 
effectively, etc. Analagous problems arise regardless of who 
originated the innovation. 

Lack of consideration of "new busines s fraction ." As noted 
in the main text, only some fraction of the parts running through 
a supplier's innovative equipment are "new business" -- parts tne 
supplier would not have sold but for his offering the equipment 
to go with them. It is the profit on this portion of the total 
parts, not the total itself, that is normally considered the 
innovating supplier's benefit. Inability to get estimates of new 

Page 38 

business fractions for the innovations forced use of the 
procedure of simply calculating the profit on total part 
consumption and taking ratios of supplier benefit to next-highest 
benefit. This simplification would not affect the rank ordering 
of relative benefits if the new business fraction is actually the 
same for each innovation. But where it differs greatly from 
innovation to innovation, applying the true fractions might 
produce a re-ordering of the list. 

The actual fraction of machine part consumption that is new 
business is a difficult number to estimate. It depends in 
complex ways on the supplier-innovator's market share, the 
responses of competitors to the new equipment, the 
substi tutab il ity of competitive parts, and more. No simple 
method of estimating it in particular cases was known, or it 
would have been used. Nor was there an obvious argument for why 
the new business fraction might tend to be higher or lower for 
termination equipment innovations than for wire and cable 
equipment innovations, or for why it might tend to be higher or 
lower for the innovations that were originated by suppliers than 
for the innovations that were originated by nonsuppl ier s . The 
analysis is thus currently unable to identify a systematic bias 
in the hypothesis test resulting from this simplification. 


Berger 1975 

Berger, A . Factors I n f luenc ing the Locus o_f Inn o vatio n 
Activity Leading to Sci entif ic Ins t rumen t and Pla stics 
Innovation . Unpublished S.M. Thesis, M.I.T. Sloan School of 
Management. Cambridge, Massachusetts: June 1975. 

Boyden 1976 

Bo yd en, J. A Study of 
Plastics Additives Industry . 

t he Inn ovation 

Sloan School of Management 

Unpublished S.M. Th 
Cambridge, Massachusetts: 

Pro cess i_n the_ 
sis , M.I.T. 

Corey 1956 

Corey, E . R . The Deve lopment o f Markets for N ew M ai_t££ i^ a l_s . 
Cambridge, Massachusetts: Harvard University Press, 1956. 

Peck 1962 

Peck, M.J. "Inventions in the Postwar American Aluminum 
Industry." In The Rate and Direction of Inve nti ve A_c ,t,i _v_i t_y_ ; 
Economic and Soci al Factor s . Princeton, New Jersey: Princeton 
University Press, 1962. 

h. Com par i son of the Loc us of Inno vatio n 

Spierings 1979 

Spierings, P. A.M. 
With Related Cost and Benefit ^n Speci a liz ed Process Machinery , 
Unpublished S.M. Thesis, M.I.T. Sloan School of Management, 
Cambridge, Massachusetts: June, 1979. 

von Hippel 1976 

von Hippel, E.A. "The Dominant Role of Users in the 
Scientific Instrument Innovation Process." Rese a rch Polic y Vol. 
V, No. 3. July 1976. 

von Hippel 1977 

von Hi ppel , 
Semiconductor and 
IEEE Transaction s 
May 1977 

E.A. "The Dominant Role of the User in 

Electronic Subassembly Process Innovation." 

on Engineering Management Vol. EM-24, No. 2. 

von Hippel 1979 

von Hippel, E.A. " Appr opr iab il i ty of Innovation 
a Predictor of the Functional Locus of Innovation." 
Working Paper (/M084-79), M.I.T. Sloan School of 
Cambridge, Massachusetts: June 197 9. 

Benefit as 
Unpub lished 

von Hippel 1981 

von Hi ppel , E.A, 

Personal communication 

Nov ember 1981. 

OC 5 '82 



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APR 7 2002 


744288 0*PLi 

3 -man no? ° 15 227